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Meeting With Management Teams
I am typing this from the balcony of a small little beach town with the east coast sun shining on my legs. Cars of tourists slowly drive past. I just came in from the ocean. Caked covered in sticky sand and greasy sunscreen.
The day before I was at a meeting. The first management meeting I have had since COVID-19. Took a day trip to a small southern town to meet with a small company not known to the rest of Wall Street. It was refreshing. To be back on the road. Away from the excel models and annual reports. A face to face meeting with a public company.
Through my career on Wall Street, I have met with countless management teams. Too many to count. Flown into almost every major U.S. airport and all but nine states. If I had to count I have probably toured close to 500 different companies.
That was my dream when I first got into investing. I would read about how all the legendary portfolio managers met with public companies before investing. Peter Lynch was my hero. He would fly all over the country. Get face to face meetings and tour industrial plants. His way to get an edge over the rest of the Street. I sincerely believe Lynch’s key to outperformance was directly because he met with public companies.
The stuff really works. You will gain so much knowledge a computer screen cannot give you. There is no replacement for a management meeting. You can have a 25 page excel sheet. Thousands of pages of notes. Talk with all the sell side researchers you know. But nothing, and I mean nothing, will replace the experience of meeting with the management team and seeing how a company makes money.
Here’s a personal example. A few years back I was interested in buying a company that built hopper cars for trains. I was interested because the company looked significantly undervalued. There was a ton of cash on the balance sheet. The inventories were worth more than the enterprise value. And there wasn’t a cent of debt. A classic net-net that no one gave two damns about.
Despite the squeaky-clean balance sheet, the company had an extremely hard time of turning any profit. I didn’t quite understand it. I spoke with the CFO on the phone multiple times. We walked through the business model, and I still couldn’t figure out why they couldn’t make money building hopper cars. To try to understand the business better I set up a tour of the manufacturing plant.
I flew into a small town in the middle of nowhere. A small industrial town that no one knows exists. My meeting was bright and early in the morning. All I had to eat was stale eggs from a third-rate hotel.
When I got to the manufacturing plant, I realized how massive the operations were. It was so big there were trucks and golf carts you would get on inside to take you from one end to the other. Trains were being built everywhere I looked. Welders and steel. It had to have been a couple miles long of pure industrial manufacturing.
But the size was the problem. The company used to make a significant amount of money when there was demand for coal cars. But ever since the fall of coal industry, the company stopped turning a profit as they were forced to make other cars that were just not as profitable.
In addition, they were leasing a manufacturing facility that had an insane amount of fixed costs including a lease they just couldn’t afford. The lease alone on the facility cost so much that at the current capacity they were running, they were losing more money than they were making. The only way for this company to turn a profit was if they built more train cars but there just wasn’t any demand. It was a problem that just wasn’t going to fix itself.
After that meeting I knew that I wasn’t going to invest in this company. There was just no way they could ever turn a profit with the extremely high fixed cost base they were running. That is unless the demand for train cars started to increase exponentially, which just wasn’t going to happen. And from my top-down macro research, it didn’t appear as if this was going to happen at all. So I never took at stake.
You learn a lot from a company tour. You see the insides of the entire operation. You get to see how management reacts when you ask a tough question. You even get to interact with the lower-level employees to see how they like the work.
Excel models only go so far. My models were not telling me that the fixed costs of running a manufacturing facility were just not economical. Sure, I could have pushed the CFO about the fixed costs on one of my calls with him. But the high fixed cost base didn’t even cross my mind as I couldn’t see the sheer size of the facility from my excel model.
Touring the facility gave me this insight. Not an excel model. Not an annual report. Not even reading the earnings transcripts. A tour of the facility and that is it. That tour gave me the edge I needed. It gave me the information I needed to know. After that tour I knew I wasn’t going to drop any money into this stock and would avoid at all costs. That is until anything dramatically changed on the macro front.
If you are a serious investor, and you buy stocks because you want an ownership interest in that business, the best way to really understand how that business works is by meeting with the management team and touring their operations. There is nothing like it. And if you do enough of these tours, you will get an edge, and become a much better investor.
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